How To Build Regular Income From Mutual Fund Investments?
Mutual Funds are a professional managed investment vehicle which allows you to get a diversified portfolio of stocks, bonds, gold, etc at a low investment size compared to direct investing.
Mutual funds investments can be planned to meet several life goals such as tax saving, wealth creation, retirement planning, children’s education, etc.
In this article we will be discussing one such financial goal that is Retirement Planning and how much mutual fund investments can help you build regular income.
Investment options available for regular income post retirement:
- Bank FD
- Annuities from life insurance policy
- Rental Income
- Senior Citizen Savings Scheme such as NPS
- RBI Floating Rate Savings Bonds
- Systematic Withdrawal Plans in Mutual Funds.
Quick Comparison of the different investments mentioned above:
| Bank FD | Rental Income | Annuity from Insurance | Senior Citizens Savings Scheme | RBI Floating Rate Savings Bond | SWP in Mutual Funds | |
| Flexibility | Medium | Medium | Medium | Low | Low | High |
| Liquidity | High | Low | Low | 5-year lock in | 7 year lock-in | High |
| Risk | Low | Medium | Medium | Low | Low | High |
| Returns | 6-7% | 3-4% | 5-7% | 7-8% | 7-8% | Market linked |
| Limit on Investment | NA | NA | NA | 15 lakhs | NA | NA |
| Taxation | 30% | Rental Tax | 30% | 30% | 30% | 10% LTCG |
*Assuming the highest tax bracket of 30% apply.
*LTCG – 10% on gains more than 1,00,000 and STCG of 15%
How does SWP in Mutual fund investment work?
SWP is an effective way to create regular income from mutual fund investments
It is an investment style under which a lump sum investment in a particular scheme is initially made by an investor or the total wealth created in Portfolio after years of SIP is taken out of the scheme by selling off the units at a regular time interval. Cash generated after selling of the units is transferred back to the bank account.
What are the advantages of SWP?
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Flexibility:
You can start, stop, increase or decrease your withdrawal from a mutual fund scheme using SWP.
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Liquidity:
You can withdraw full or partial investments at any point of time.
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Choices:
You can modify your exposure in different assets by change of schemes depending on your risk appetite and time horizon.
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Tax Benefits:
Compared to other regular income investments that are taxed up to 30%, SWP in mutual fund investments are taxed at 10% on long term gains above 100000 and 15% on short term gains.
Illustration of Tax Benefits in SWP:
Assume an investor invests Rs. 50 lakhs for a period of 10 years in a Bank FD and Mutual funds:
| FIXED DEPOSIT | SWP IN MUTUAL FUNDS | ||||
| YEAR | TAX | NET IN HAND | CAPITAL GAINS (exempted up to 1 lakh) | EFFECTIVE TAX (10% on more than 1 lakh) | NET IN HAND |
| 1 | 90,000 | 2,10,000 | 52,837 | – | 3,00,000 |
| 2 | 90,000 | 2,10,000 | 88,860 | – | 3,00,000 |
| 3 | 90,000 | 2,10,000 | 1,21,815 | 2,181 | 2,97,819 |
| 4 | 90,000 | 2,10,000 | 1,40,772 | 4,077 | 2,95,923 |
| 5 | 90,000 | 2,10,000 | 1,60,646 | 6,065 | 2,93,935 |
| 6 | 90,000 | 2,10,000 | 1,75,360 | 7,536 | 2,92,464 |
| 7 | 90,000 | 2,10,000 | 1,79,697 | 7,970 | 2,92,030 |
| 8 | 90,000 | 2,10,000 | 1,84,072 | 8,407 | 2,91,593 |
| 9 | 90,000 | 2,10,000 | 2,03,890 | 10,389 | 2,89,611 |
| 10 | 90,000 | 2,10,000 | 2,15,982 | 11,598 | 2,88,402 |
Even if both FD and mutual funds had same returns, you would save Rs 8,41,777 in taxes
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Market linked Returns:
As the returns are linked to markets, you can earn returns that beat inflation. Further, based on past performance of different assets, you can easily see that mutual fund investments have outperformed.
Track record of SWP for best mutual funds as in 2022:
Investment of Rs 50 lakhs was done in 2011 and SWP was started from 2012. Performance in 2022:
| Scheme Name | Annual Withdrawal | Monthly Withdrawal | Total Withdrawal | Current Value | Return % |
| HDFC Equity Savings | 6% | 25,000 | 30,00,000 | 83,97,876 | 9.28% |
| ICICI Pru Balanced Advantage | 6% | 25,000 | 30,00,000 | 1,30,84,278 | 12.92% |
| Canara Robeco Equity Hybrid | 9% | 37,500 | 45,00,000 | 1,12,86,940 | 13.71% |
*Past performance is not necessarily indicative of future performance of the schemes
Our recommendation of best mutual funds for SWP in 2022:
| Scheme Name | 5 Years Return % | 10 Years Return % |
| Kotak Debt Hybrid Fund | 8.48% | 9.58% |
| SBI Conservative Hybrid Fund | 7.94% | 9.21% |
| ICICI Prudential Regular Savings Fund | 8.31% | 10.04% |
| Canara Rob Conservative Hybrid Fund | 8.08% | 8.69% |
| Edelweiss Balanced Advantage Fund | 11.16% | 11.48% |
| ICICI Pru Balanced Advantage Fund | 9.93% | 12.09% |
| Canara Robeco Equity Hybrid Fund | 11.96% | 13.74% |
| ICICI Prudential Equity & Debt Fund | 14.01% | 16.26% |
| Quant Absolute Fund | 19.28% | 17.91% |
| HDFC Hybrid Equity Fund | 9.04% | 12.04% |
*Past performance is not necessarily indicative of the future performance of the schemes
Conclusion
The best mutual funds for you would be based on your need for investment (Goals), risk profile, time horizon and returns expectation, there isn’t one scheme that will be best suited for all. Hence, always do adequate research before you invest.
